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Be Careful Naming a Revocable Trust as Beneficiary of Life Insurance

A 2012 Florida case underscores the risk in naming a Revocable Trust as a beneficiary of a life insurance policy. The decedent named his Revocable Trust as beneficiary of two life insurance policies. The Revocable Trust provided that the Trustee shall pay all of the debts and expenses of the decedent’s estate prior to making distributions. A clause of this nature is quite common in Revocable Trusts.

Normally life insurance is exempt from creditors of a decedent. Fla.Stat. §222.13(1) provides: “Whenever any person residing in the state shall die leaving insurance on his or her life, the said insurance shall inure exclusively to the benefit of the person for whose use and benefit such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured unless the insurance policy or a valid assignment thereof provides otherwise.”

When life insurance is payable to an estate, however, the proceeds are administered like any other asset subject to probate and are available to pay the decedent’s debts.

The Court held the proceeds would not be exempt because the Revocable Trust contained a provision which required trust assets to be used to pay debts and expenses and the decedent had effectively waived the exemption that normally exempts life insurance from probate claims.

Thus, it is very important to seek legal advice before naming a Revocable Trust as beneficiary of life insurance policies. Every person that owns life insurance should have the beneficiary designation reviewed in conjunction with a review of his or her Revocable Trust to determine whether or not a change needs to be made in light of the Morey decision. I typically recommend naming a sub-trust created under the Revocable Trust (or under a Last Will and Testament) as beneficiary because in that case the exemption will apply and the proceeds will not be available for estate creditors.

2500 North Military Trail, Suite 312
Boca Raton, Florida   33431
Phone: 561-392-1800

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